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UK Equity Income

UK Equity Income sector

Equity income funds are popular with our clients. Most aim to generate a rising income, and increase the value of your original investment over the long term.

Joseph Hill - Investment Analyst
4 February 2022

UK Equity Income funds remain popular with our clients. Partly due to the low level of return currently available on other traditional sources of income, such as bank deposits or government bonds. Most funds in this sector aim to generate a rising income, as well as increase the value of your original investment over the long term. Any income can be paid out to you as cash or reinvested back into the fund to help boost long-term growth.

Different fund managers take different approaches to income investing. Some focus on larger companies that are seen to be more stable and have paid regular dividends for many years. Others invest in higher-risk small and medium-sized companies. These might pay a lower income to start with but can have more dividend growth potential. Increasingly some managers also use their ability to invest up to 20% of the fund overseas to add diversification and allow exposure to sectors and industries less available in the UK equity market.

Our view

Investing in a dividend-paying company can mean your income and capital grows as the company grows. The best companies will grow their profits and dividends over the long term, though not all companies' profits – and therefore their dividends – are sustainable. The extraordinary events of 2020 provided a particularly harsh lesson in this regard as the effects of the Covid-19 pandemic severely impacted upon many companies' ability or willingness to pay dividends.

In general, however, we like equity income funds as an expert fund manager invests in a range of companies, reducing the impact if one gets into trouble. It's less risky and more convenient than trying to choose individual shares yourself.

Interest rates have risen from the historic low of 0.1% to 0.5%, but this is still very low by historical standards. Given inflation in the UK is elevated above the Bank of England’s 2% target at the moment it’s possible we’ll see more rate rises in the coming months. In practice the impact of inflation on earnings will vary by economic sector. Companies that pass on higher input costs to end consumers can preserve or grow their earnings and distribute the excess in dividends if they wish.

Dividends are clearly important for investors who require income, but an equity income fund can also be relevant for those seeking capital growth. If not required now, dividends can be reinvested to increase the number of shares held, from which more dividends can be taken at a later date. Repeating this process over a long period (known as compounding) is a way to grow capital, though there are no guarantees.

We think equity income funds can provide an important element of almost any investment portfolio. Keeping cash aside for a rainy day is important and an income fund could be considered for savings that aren't needed in the medium term. Reinvesting dividends when you don't need the income could potentially help your pot grow at a faster rate. However, investments and their income don't offer the same security as cash, and will go up and down in value, so you could get back less than you invest.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Wealth Shortlist funds in this sector

Funds chosen by our analysts for their long-term performance potential

See the Wealth Shortlist

2021 has seen the prospect of some return to normality and a much better year for the UK market. Over the past 12 months to the end of December 2021, the IA UK Equity Income sector returned 18.42% compared with 18.32% for the FTSE All Share index. This marks a stark turnaround from the previous year which saw returns of -10.79% and -9.82% respectively.

Many UK Equity Income funds have the potential to hold up better in adverse market conditions. But in early 2020 the speed and scale of the Covid-19 crisis had an immediate impact on dividends. Some of the natural hunting grounds for income, such as banks and oil, were hit hard as the pandemic reduced demand for travel and damaged economic growth.

Income funds tend to invest more in companies perceived to be undervalued, which often pay higher dividends. The growth of dividends paid by companies in the UK is expected to slow in 2022 to just 2% after a strong bounce back in 2021. The FTSE 100, which features the biggest dividend payers in the UK market, is expected to yield 4.1% in 2022, though of course there are no guarantees.

However, with new coronavirus variants like Omicron threatening to hit the economy and disrupt the recovery, dividends aren’t guaranteed and could be vulnerable again if company earnings take a meaningful hit. Investors can look at the level of dividend cover a firm has to assess if the profits the company’s making are sufficient to maintain the dividend it’s paying.

Dividends have long been a key element of the UK market and we expect this to continue.

We think the UK Equity Income sector can be an excellent way to grow your wealth over the long term. There is some evidence UK companies look better value than other global markets after many years of being in the doldrums. Volatility is likely to persist in the near term though, especially while the world continues to battle the pandemic.

In the past 10 years, the UK Equity Income sector’s returned 118.08%* compared with the FTSE All Share’s 110.7% gain. Remember past performance isn’t a guide to future returns.

Chart showing 10 year performance of the UK Equity Income sector vs FTSE All-Share

Scroll across to see the full chart.

Past performance is not a guide to the future. Source: *Lipper IM to 31/12/2021.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Ten year performance

  • IA UK Equity Income

    +118.08%

  • FTSE All Share

    +110.70%

Data correct as at 31/12/2021. Please remember past performance is not a guide to future returns.

We regularly review all the major investment sectors. Here we provide comments on a selection of funds in the UK Equity Income sector. They're provided for your interest but not a guide to how you should invest. If you're unsure if an investment is right for your circumstances please seek personal advice. Comments are correct as at 31 December 2021.

Each of the funds below can take their charges from capital. This can increase the yield but reduce the potential for capital growth. All investments can fall as well as rise in value so you could get back less than you invest. There is a tiered charge to hold funds with HL. It is a maximum of 0.45% a year - view our charges.

Our Wealth Shortlist features a number of funds from this sector, selected by our analysts for their long-term performance potential. The Shortlist is designed to help investors build and maintain diversified portfolios. To use the Shortlist, you should be comfortable deciding if a fund fits your investment goals and attitude to risk. For investors who don't feel comfortable building and maintaining their own portfolio we offer ready-made solutions, which are aligned to broad investment objectives. For those who want personal recommendations, you can also ask us for financial advice.

Wealth Shortlist fund reviews

The fund's managers are disciplined in seeking out companies they think can grow their cash flow, as that's what ultimately pays investors' dividends. They also keep the fund diversified, to reduce the impact of any dividend cuts on the wider portfolio. Adrian Frost, Nick Shenton and Andy Marsh mainly invest in large UK companies, but they also invest in medium-sized and overseas companies if they think there's an excellent opportunity. Frost is one of the most experienced managers in the UK Equity Income sector, and we think he's built a talented team around him.

We think the managers' combined skill, discipline and experience puts them in a strong position to deliver healthy income and long-term growth, but there are no guarantees. The managers have the flexibility to invest into high yield bonds which if carried out can increase overall risk in the portfolio.

The fund managers look for companies which are market leaders with a competitive advantage and predictable cash flow. This tends to be a concentrated fund, so each holding can have a significant impact on performance, both positively and negatively, and can therefore increase risk. Chris Murphy is an experienced income investor and has managed the fund since April 2009. He was joined by co-manager James Balfour in June 2016.

The managers target a higher income than the FTSE All Share, alongside capital growth over the long term. The core of the portfolio is invested in high-quality, cash-generative companies, but they also look at companies that are recovering or unloved by other investors. In addition, they invest in some higher-risk medium-sized and smaller companies.

Siddarth Chand-Lall focuses on income opportunities among small and medium-sized companies, which have more growth potential than bigger ones though they are higher-risk. Investments in smaller companies, including AIM listed companies, makes this fund different to many others in the UK Equity Income sector.

We rate Chand-Lall highly and think he has the support of one of the UK's strongest smaller company investment teams. Most UK Equity Income funds gravitate towards the largest companies on the stock market, so this fund could be a good diversifier to an income-focused portfolio.

Jupiter Income focuses on undervalued UK companies which could pay a dividend, so the fund can add diversification to an income portfolio. This style bias can mean the fund is out of favour through certain periods of the market cycle.

Ben Whitmore has managed funds for more than 20 years and is experienced when it comes to unearthing undervalued companies. He is assisted by Dermot Murphy. As well as the Jupiter Income fund, the two run Jupiter UK Special Situations and Jupiter Global Value Equity, using the same process and value bias. Whitmore invests in some overseas companies in this fund too, providing some diversification.

Whitmore and team have been steadfast in their value style through thick and thin. We think the fund would work well alongside other UK equity income funds with a different style bias to add diversification. Investors should be aware that this is a concentrated portfolio which can increase the volatility of returns.

The fund blends high-quality dependable dividend-paying companies with some unloved companies the manager thinks have the potential to recover and boost the fund's gains. The fund is quite concentrated so if one holding gets into trouble it can have an adverse effect on performance.

Richard Colwell's an experienced manager who, unlike many others in the equity income sector, only invests in UK companies. He's bold and patient enough to invest in unloved and unfashionable companies he thinks have good long-term potential. We like Colwell's sensible approach, doing the simple things well, and think this fund could provide a good foundation for an income portfolio.

The fund has a slightly different objective to other income funds. It aims to provide a rising income, but with lower volatility than the market and an emphasis on sheltering wealth in a falling market. This is a trait of Troy's range of funds and makes the fund a good diversifier compared to others in the sector.

The fund is managed by a team of three, based around the experienced Francis Brooke who has managed this fund since launch. Additional resource was added recently to the team, with an eye to longer-term succession planning. The team works closely with other members of Troy who share a common investment philosophy.

A key element of the approach is to avoid economically sensitive, less consistent businesses and those that require high levels of investment to keep going. There is a greater focus on larger companies compared to some other income funds. The managers also invest up to 20% overseas where they find the best opportunities not available within the UK market. This is quite a concentrated fund and, while the team focuses on minimising losses, it could be susceptible if one or more of their holdings gets into trouble.

They like high-quality, dependable companies that could do well even when the economy is weak, and overseas companies offer diversification to industries less common in the UK.

This fund invests in Hargreaves Lansdown plc.

Latest research updates

Troy Trojan Income: April 2022 fund update

Troy Trojan Income: April 2022 fund update

Thu 28 April 2022

In this fund update, Senior Investment Analyst Joseph Hill shares our analysis on the manager, process, culture, ESG integration, cost and performance of the Troy Trojan Income fund.

Marlborough Multi Cap Income: March 2022 fund update

Marlborough Multi Cap Income: March 2022 fund update

Thu 31 March 2022

In this fund update, Senior Investment Analyst Joseph Hill shares our analysis on the manager, process, culture, cost and performance of the Marlborough Multi Cap Income fund.

Artemis Income: January 2022 fund update

Artemis Income: January 2022 fund update

Wed 19 January 2022

In this fund update, Investment Analyst Joseph Hill shares our analysis on the manager, process, culture, cost and performance of the Artemis Income fund.

Threadneedle UK Equity Income: November 2021 fund update

Threadneedle UK Equity Income: November 2021 fund update

Tue 16 November 2021

In this update, Investment Analyst Joseph Hill shares our analysis on the manager, process, culture, cost and performance of the Threadneedle UK Equity Income fund.

Aviva UK Listed Equity Income: September 2021 fund update

Aviva UK Listed Equity Income: September 2021 fund update

Fri 17 September 2021

Senior Investment Analyst Kate Marshall shares our analysis on the manager, process, culture, cost and performance of the Aviva UK Listed Equity Income fund.

Investment notes

Please note the research updates are not personal recommendations to trade. If you are unsure of the suitability of an investment for your circumstances please seek advice. Remember all investments can fall as well as rise in value so investors could get back less than they invest.

Fund research

Our expert research team provide regular updates on a wide range of funds.

See fund updates